It’s just around the corner – the big day when your child or grandchild heads off to college or university for year one of their next great educational adventure. You’ve prudently planned for this day by regularly contributing to investments held within a Registered Education Savings Plan (RESP) – and now it’s time to get the most out of it with the right withdrawal strategies that will minimize your student’s taxes and get the full benefit of the Educational Assistance Payments (EAPs) for qualifying educational programs. EAPs consist of the Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB) and the income or growth earned from the money you’ve invested in the RESP.1
Withdraw EAPs before withdrawing contributions. As the subscriber of your student’s plan, you can elect to withdraw the income, grant, and bonds as EAPs, which will be taxable in the hands of your student whose low income, and personal credits and deductions (including the tuition credit, education credit, moving expenses deduction, and so on) should offset some or all of the income inclusion of the EAP.
Withdraw contributions after your student starts school. Early withdrawal will trigger a CESG repayment.
Spread out the EAPs over the length of your student’s educational program. Taking a lump sum in the first year may burden your student with a high taxable income. Spreading out the EAPs over a number of years takes advantage of your student’s (usually) lower marginal tax rates.
Avoid potential CESG clawbacks by withdrawing EAPs when you can. If there is any
CESG or CLB remaining in your investments held within a RESP after your student completes (or leaves) their post-secondary program, you may be required to refund this “excess” CESG grant money.
Get proof of enrolment right away so you’ll have money when you need it. Before releasing an EAP, your RESP carrier will require proof of enrollment.
Use leftovers wisely. Any contributions remaining in the plan after your student finishes college or university are yours to use as you wish – transfer them to another child’s plan or withdraw them for personal use.
When you started that RESP many years ago, you probably wondered if it was a good investment strategy. Now you know that it was – especially today, with a post-secondary education so costly and so necessary. Talk to your professional advisor about other good strategies for achieving a debt-free education for your children or grandchildren and financial stability for your family.1The Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.
Mike Ouellette is an enthusiastic financial consultant, with his prime focus being young families who are interested in learning about planning for their financial future. If you have any questions or are interested in learning how to begin planning for the future of your family, he’d welcome your questions regarding Registered Education Savings Plans, Mortgages, Retirement Planning, Income Protection, or any other financial worry you’d like to have addressed.